CAPÍTULO SEGUNDO: LOS PRINCIPIOS DE EXCLUSIÓN SEGÚN

In the following two cases income shall not be deemed to accrue/arise in India.

(i) Approved agreements made before April 1, 1976

In order to ensure that foreign suppliers of technical know how who had finalized proposals for the receipt of lump sum royalties with the approval of the Central Government on the understanding that such payment would be exempt from income tax, it has been provided that such lump sum payment received under approved agreement made before April 01,1976 is not deemed to accrue or arise in India.

If an agreement is made on or after April 1,1976 it will be deemed to have been made before that date, if the following conditions are fulfilled:

(a) in the case of a taxpayer other than a foreign company, if the payment is made in accordance with proposals approved by the Central Government before that date;

(b) in the case of foreign company, if the agreement is made in accordance with proposals approved by the Central Government before that date and the company exercise an option by furnishing a declaration in writing to the Assessing Officer that the agreement may be regarded as having been made before April 1,1976

The option in this behalf has to be exercised before the expiry of the time allowed under section 139(1) or section 139(2) (whether fixed originally or on extension) for furnishing the return of income for the assessment year 1977/78 or the assessment year in which the royalty income first become chargeable to tax, whichever assessment year is later. For option so exercised is final not only for the assessment year in relation to which it is made but also for every subsequent year.

(ii) Computer software

With effect from the assessment year 1991/92 onwards so much of the income by way of royalty as consists of lump sum payment made by a person, who is resident, for the transfer of all or any rights (including the granting of a licence) in respect of computer software supplied by a non resident manufacturer alongwith computer hardware under any scheme approved under the Policy on Computer software Export, Software Development and Trading 1986 of the Government of India shall not be deemed to accrue or arise in India.

For the purposes of meaning of Royalty, “computer Software” means any computer programme recorded on any disc, tape, perforated media or other information storage device and including any such programme or any customized electronic data.

Important Judicial Precedents & Board Circulars:

1. The term ‘royalty’ normally connotes the payment made to a person who has exclusive right over a thing for allowing another to make use of that thing which may be either physical or intellectual property or thing. The exclusivity of the right in relation to the thing for which royalty is paid should be with the grantor of that right. [CIT v Neyveli Lignite Corporation Ltd. 243 ITR 459 (Mad)].

2. Royalty received by the assessee foreign company under a collaboration agreement with Indian company, according to which Indian company was to manufacture certain machines and pay royalty to foreign company on products manufactured, would be

income deemed to accrue or arise in India. [CIT v. Ruti Machinery Works Ltd. 243 ITR 442 (Mad)].

3. Consideration paid by the Indian customers or end users to the assessee a foreign supplier, for transfer of the right to use the software/computer programme in respect of the copyrights falls within the mischief of 'royalty' as defined under sub-clause (v) to Explanation 2 to clause (vi) of section 9(1) of the Income-tax Act, 1961, CIT v Samsung Electronics Co. Ltd [2011] 203 Taxman 477 [Karnataka]

4. Payment made by assessee to a non-resident in order to obtain licence to use database maintained is to be regarded as royalty. CIT v Wipro Ltd [2011] 203 Taxman 621 (Kar)

5. The assessee-company was engaged in the manufacture of audio magnetic sound heads. It entered into an agreement with a Singaporean company whereby the foreign company was to supply plant know-how and product know-how to the assessee and, if required, would also make available the services of trained technicians for setting up the plant and machinery in accordance with the printed material and data. The documents and the agreement clearly showed that the assessee had purchased the entire drawings, sketches, designs, etc. It might be true that the foreign company was required to provide technical assistance, if required, but the fact was that no such technical assistance was ever required nor was provided. The payment of 15 million yen was the price of the documents purchased and would not fall within the meaning of royalty CIT v. Maggronic Devices (P.) Ltd [2010] 190 Taxman 382 (HP) 6. The main service rendered by the assessee to its clients-hotels was

advertisement, publicity and sales promotion, the use of trademark, trade name or the stylized ‘S’ or other enumerated services referred to in the agreement with the assessee were incidental to the said main service. It was held that payment was neither in the nature of royalty under section 9(1)(vi), read with the Explanation 2, nor in the nature of fee for technical services under section 9(1)(vii) Director of Income-tax v. Sheraton International Inc. [2009] 178 Taxman 84 (Delhi)

7. In Asia Satellite Telecommunications Co. Ltd v Director of Income-tax [2011] 197 Taxman 263, Delhi HC has clarified that the term ‘royalty’

in respect of the copyright, literary, artistic or scientific work, patent,

invention, process, etc., does not extend to the outright purchase of the right to use an asset. In the case of ‘royalty’ the ownership of the property or right remains with the owner and the transferee is permitted to use the right in respect of such a property. In this case the assessee was deriving income from the lease of the transponder capacity of its satellites. It was amplifying and relaying the signals in the footprint area after having been linked up by the TV channels. It also remained in the control of the satellites. It had not leased out the equipments to the customers. Where the operator has entered into an agreement for lease of the transponder capacity and has not given any control over parts of the satellite/transponder, the provisions of clause (vi) would not apply. (Ruling of the AAR in ISRO Satellite Centre (ISACT), In re [2008] 307 ITR 59 / 175 Taxman 97 (New Delhi) followed)

8. In the case of CIT v. HEG Ltd. [2003] 263 ITR 230 [MP], the question whether subscribing to a journal which gave information on a particular industry, and which was commercial in nature could be termed royalty came up for consideration. Rejecting the CIT’s contention that the since the journal was of a commercial nature, payments made for it would be royalty, the High Court held that the mere characteristic of being commercial in nature would not make it a thing for which royalty would be payable. Some sort of expertise or skill was required. So, in the absence of such skill in the journal, payments made to it would not be royalty.